Reprinted with permission.
This article was first published in INSOL International’s December News Update.
The ongoing evolution of Singapore’s new restructuring law
Two recent (and ongoing) cases provide valuable guidance on the application of key provisions in Singapore’s new restructuring regime, namely:
- the qualifying criteria to obtain moratorium protection under section 211B(1) of the Companies Act (Cap 50, 2006, Rev Ed) (“the Act”);
- the level of disclosure required to be provided by a company seeking to obtain moratorium protection pursuant to section 211B(4) of the Act; and
- the guiding principles in determining when a moratorium ought to be extended.
The Singapore Companies (Amendment) Act 2017 introduced a raft of changes which significantly overhauled Singapore’s corporate rescue and restructuring framework. The amendments followed a period of consultation with relevant stakeholders and were introduced with a view to making Singapore a compelling jurisdiction for cross-border restructurings by introducing an infrastructure which would provide debtors, lenders, distressed investors and other stakeholders with the necessary tools to undertake successful restructurings.
The new regime, which borrows from certain aspects of the United States Bankruptcy Code (“the Bankruptcy Code”), combines a debtor in possession framework together with a scheme of arrangement to enable a restructuring plan to be negotiated and implemented.
By way of recap, the key features are:
- an enhanced moratorium with extraterritorial effect, providing for:
- an automatic 30-day moratorium protection upon filing with any application for further extension to be on notice to creditors and subject to court order;
- the moratorium to have worldwide effect to the extent Singapore can assert relevant jurisdiction via the “substantial connection” test; and
- moratorium orders can be extended to entities related to the debtor;
- the introduction of Chapter 11 style rescue / debtor in possession financing. This is modelled along the lines of the DIP financing pursuant to section 364 of the Bankruptcy Code, allowing priming amongst other tools;
- the introduction of a cross-class cram down in a scheme of arrangement which provides the court with a discretion to sanction a scheme notwithstanding one or more classes having voted against the scheme, subject to certain conditions;
- the introduction of a US style pre-packaged scheme of arrangement, allowing debtors to dispense with the formal meeting requirements under a traditional scheme; and
- increased disclosure of information.
The amendments came into effect on 23 May 2017.
The Hyflux Group
In early May 2018, six (6) entities within the Hyflux Group of companies filed for the automatic 30- day moratorium protection. Hyflux Ltd, the parent company, is listed on the Singapore stock exchange and operates in the water treatment and desalination market. The capital structure comprises project finance debt at the project companies, one of which Tuaspring applied for moratorium protection however, subsequently withdrew the application, senior unsecured bank debt, medium term notes, trade debt, perpetual securities and preference shares. At the time of filing, Hyflux had approximately SGD3.0 billion of debt and significant contingent liabilities relating to performance bonds for projects that Hyflux had either completed or were in the process of completing.
Application for moratorium protection
By applications dated 22 May 2018, the relevant entities sought an extension of the moratorium for a period of six months. While there was broad creditor support for the extension, some creditors sought to limit the moratorium to a shorter period and indicated that their support was subject to Hyflux providing them with certain information relating to its business.
The Court granted the six-month extension and imposed certain disclosure requirements.
In October 2018, an application was made by a group of bank creditors, supported by other creditors, for the disclosure of information. This was the first occasion on which a Singapore court was required to consider the extent to which a company, the subject of moratorium protection, must disclose information to its creditors.
While no formal judgment was handed down, His Honour Justice Aedit Abdullah observed that any test for “sufficiency of information” must be objective to assess what is considered sufficient for a reasonable creditor.
Accordingly, while no test has been laid down, the clear guidance from the determination of this application is that an objective approach looking at the “sufficiency” of information from the perspective of a reasonable commercial creditor will guide the limits and requirements of disclosure under the new regime.
Extension of the moratorium
By order dated 26 November 2018, the court extended the moratorium granted to the Hyflux entities for a further four months until 30 April 2018. This brings the total period of the moratorium to ten months.
Hyflux’s application for the extension was contested with certain creditors seeking the extension to be for a shorter period during which it was asserted it would become clear whether or not a restructuring can be achieved. Hyflux sought the four-month extension on the basis that it matched the long stop date agreed to by Hyflux in an investment agreement it signed with a potential white knight investor.
Despite the objection from creditors, the court ultimately awarded the four-month extension. In doing so, Justice Abdullah found that the shorter period was not a sufficient length to allow negotiations and other steps to progress. While noting the concerns from the objecting creditors, His Honour found that sufficient protection was to be found in convening a case management conference for 21 January 2019, stating creditors could raise any objections during the conference if they felt at that stage sufficient progress was not being met.
The trend emerging from the Hyflux decisions to date is that the court, within reason, will support the debtor’s efforts to achieve a restructuring, even in the face of creditor objection.
IM Skaugen  SGHC 259
By written judgment dated 27 November 2018 His Honour Justice Kannan Ramesh provided further valuable guidance on what must be established in order to satisfy the requirements of section 211B to obtain moratorium protection.
Necessary qualifying factors for moratorium protection under Section 211B
Section 211B(1) of the Act provides that a court may make an order for moratorium protection where “…a company proposes, or intends to propose, a compromise or an arrangement between the company and its creditors…”.
Section 211B(4) further provides that the company must, amongst others, file the following when applying for protection under sub section (1):
” (a) evidence of support from the company’s creditors for the intended or proposed compromise or arrangement…;
(b) in a case where the company has not proposed the compromise or arrangement to the creditors or class of creditors yet, a brief description of the intended compromise or arrangement, containing sufficient particulars to enable the Court to assess whether the intended compromise or arrangement is feasible and merits considerations by the company’s creditors…”
Issues for consideration
The issues in IM Skaugen required the Court to determine:
- whether an applicant under section 211B(1) was required to satisfy one or both of the requirements in section 211B(4)(a) and (b) as there had been differing approaches on this issue taken in past applications; and
- what constituted evidence of creditor support for the purposes of section 211B(4)(a).
The 211B question
On the first question, His Honour Justice Ramesh found that a company which had actually proposed a compromise or arrangement at the time of making the application (as opposed to proposing to do so in the future) need only furnish evidence of creditor support to establish the necessary criteria for moratorium protection.
If, however, no compromise or arrangement was proposed at the time of the application rather it was intended, the applicant would need to show both creditor support and provide a brief description of the intended compromise or arrangement. However, the creditor support that the applicant must show in such a scenario was for the moratorium as opposed to the compromise or arrangement itself given that no compromise or arrangement had yet been proposed at the time of the application.
The creditor support question
On the second question, His Honour found that a balance needed to be struck between giving adequate breathing space and ensuring that creditor rights were not excessively restrained. His Honour found that this balance would best be served by applying the following test – whether on a broad assessment, there was a reasonable prospect of the proposed or intended compromise working and being acceptable to the general run of creditors.
The judgment goes on to say that the Court should refrain from undertaking a vote count at this stage but when analysing support from creditors, the quality of that support is important such that if significant or crucial creditors were supportive, that would be a material consideration.
These two cases provide very helpful guidance as to how the new restructuring regime in Singapore will operate. As these cases progress and as the new restructuring tools are used in other cases, the case law and principles will continue to evolve and develop.